What do Vendors Need to Win in 5G?

While the telecoms industry is preparing for the first wave of 5G standards in December 2017, vendor revenues and profits are being challenged due to many factors: nationwide large-scale LTE deployments have largely been completed, giving way to topical upgrades, while telco cloud revenues have not yet created significant revenue streams. This is evident in the latest vendor financial statements for Q3 2017, where both Ericsson and Nokia have reported lower quarter-on-quarter sales and a relatively stagnant market. However, the most interesting quotes from both vendor earnings transcripts were the following:

Ericsson: “We have managed to increase our LTE market shares in Mainland China to position Ericsson in 5G. However, this will have a dilutive effect on gross margin in Mainland China in Q4 2017, but the ambition is to continue to deliver double digit adjusted operating margin in Networks in Q4 2017.”

Nokia: “While we do not see any widespread worsening in competitive intensity, we do see a change in China. The early positioning for 5G is well underway in that country, and the cost of gaining or even maintaining footprint is significant. We are working to address the situation with our deal discipline, as we want to ensure the right long-term footprint, but not at any cost.”

China is by far the biggest and most lucrative market for vendors and these arguments illustrate that early 5G New Radio contracts will be built on top of existing LTE-Advanced Pro deployments with some hardware additions, e.g., Massive MIMO and new antennas/radio units for new frequency bands. This means that there will be limited vendor swap-outs with 5G until 2021, when NG core kicks in.

The official 5G specification will be fully standardized with Release 16, aiming to be frozen by end-2019. This will include requirements, use cases, specifications and protocols for Next Generation (NG) Core and will enable new business opportunities beyond connectivity, including network slicing, service chaining and enterprise vertical services. It also seems that NG Core deployments will likely be greenfield in the early stages of rollouts, since telcos will still need to provide connectivity for their existing LTE subscribers without any interference or potential service interruptions. It is thus natural to assume that early NG Core deployments – from 2020 to 2022 – will be greenfield and will consist of telco cloud and software-driven elements which represent a completely new battlefield for infrastructure vendors. In these areas, legacy technology and existing telco relationships may not matter as much as being software-driven, agile and even supporting open source. The deployment of NG Core will also mean telcos are looking to address non-mobile broadband end markets use cases – including manufacturing, utilities and transport – which requires a completely new way of deploying networks.

The end market focus of 5G will mean that vendors need to develop new skills that will have nothing to do with telecoms, and will most often need to answer challenges related to specific enterprise verticals, rather than telco networks. For example, a network slice and edge computing placement on a factory floor will require completely different technology, operational expertise and sector knowledge compared to an autonomous car use case. This will require vendors to develop new skills that will need to predate NG Core deployments by many years.

For example, Nokia is now addressing enterprise verticals and claims several deployments in end markets, including in mining. Huawei is also discussing these markets in their X-labs R&D initiative, although these are still in a research and trial phase. On the contrary, Ericsson claims focus on telco networks – rather than verticals – in its latest strategy update. However, at ABI Research we expect that expertise in end markets and telco cloud will be crucial to win NG Core contracts. By focusing on end markets now, vendors can create processes, gain expertise and understand the intricacies of these markets long before these become a necessary attribute of a successful 5G vendor.